Consumer Products

J.P. Morgan Chase is latest to invest in future of mobile payments

Mobile payment systems are emerging at a dizzying pace

By

TreyWilliams

Reporter

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Slide 1 of 12

Pulling out a wad of cash, or writing a check at the Whole Foods checkout counter, are already outmoded ways of paying for goods. And as mobile payment systems continue to evolve, plastic credit cards could be on their way out the door as well.

Mobile payment systems are developing at a dizzying pace. J.P. Morgan Chase, the nation’s largest bank, said it will partner with a consortium of some of the country’s largest retailers, including Wal-Mart Stores Inc.
WMT, -2.75%
Target Corp.
TGT, +0.14%
and Best Buy Co.
BBY, -1.57%
to bolster its payment portfolio with a mobile payment service called Chase Pay. The move is a way for the bank to compete with the likes of Apple Inc., Samsung Electronics Co. and PayPal Holdings Inc. in the growing digital payment space.

It’s like an arms race, said Mark Ranta, senior solutions consultant for digital channels at payments company ACI Worldwide.

“We’re basically asking consumers to change what they’ve done for the last 20 to 35 years,” Ranta said. “The younger generation will adopt mobile payments much sooner, but for everyone else, it is going to take a while.”

Here’s a look at some of the key systems that are currently being developed in the world of mobile payments:

Bloomberg

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J.P. Morgan Chase will partner with Merchant Customer Exchange LLC, or MCX, a consortium of retailers, with its app, Chase Pay. The merchants have already teamed up to create their own payment system that aims to prevent banks from charging massive fees for transactions (See Slide 6).

The Chase Pay-MCX partnership could give consumer more reason to adopt mobile payments through J.P. Morgan Chase, while also saving merchants’ money. J.P. Morgan charges higher fees depending on the size of the merchant, among other things. J.P. Morgan’s head of consumer and community banking told the Wall Street Journal that the bank will lower the price it charges particular merchants if they increase the volume of consumers using Chase Pay.

Chase Pay, which the bank is planning to roll out mid-2016, will also look to pull in users by allowing merchants to push their loyalty programs and deals through the app, which is the next big step for mobile payments.

Apple
AAPL, -0.45%
made big news and lighted a fire under the rest of the market when it announced Apple Pay in September 2014. Apple’s payment system is available only on iOS, specifically for the iPhone 6 and iPhone 6 Plus models and later, as well as the iPad Air 2, iPad Mini 3, and the Apple Watch.

Apple Pay is the first system to take full advantage of near-field communication technology (NFC), and has been praised for incorporating tokenization, which helps hide users’ bank data (For more, see Slide 10).

The Cupertino-based company has some serious security features. Apple stores all of a user’s financial data in a chip called a secure element—accessed only when a “token” is provided—and it requires the user’s fingerprint for each transaction.

“Just replacing your debit card isn’t where it will shine,” said Michael Cleary, head of U.S. distribution for Citizens Bank. “What’s great about Apple Pay is the security aspect of it. I don’t think enough people are talking about it.”

Apple Pay has been hit by fraudulent transactions, although they were carried out by hackers using credit-card data stolen in recent breaches of big retailers, The Wall Street Journal reported.

Alphabet Inc.
GOOGL, +0.92%GOOG, +0.81%
had skin in the mobile payments game long before the Apple Pay announcement—and before the company changed its name. Google Wallet was introduced in 2011, but failed to capture the audience now fixated on mobile payments.

“Google Wallet was a little ahead of its time,” said ACI Worldwide’s Ranta. “If you look at Google Wallet and Apple Pay, there’s not a whole lot that’s different.”

Android Pay is a direct competitor to Apple’s system, and works much the same way. It uses NFC technology at point-of-sale terminals, and uses a separate, virtual account number to represent users’ actual credit or debit card number. However, the payment system doesn’t require fingerprint authentication for transactions.

Where Android Pay has an advantage over Apple is in its market reach—a majority of phones sold in the market operate with Google’s Android operating system. As of Aug., Android had a 56% share of the U.S. market, about 53% of the U.K. market, 77% of the China market and 82% of Mexico’s market, according to global analytical and research firm Kantar Worldpanel.

Samsung

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Samsung Pay
005930, -0.72%
is not too different from the Apple or Alphabet systems—it uses near-field communication, as well as tokenization, and Samsung’s Galaxy S6 and S6 Edge will have fingerprint biometric capabilities.

Where Samsung has a slight edge in the short term is that its system is ready for adoption now. Unlike Apple Pay or Android Pay, which are bound by newer technology and software that enables terminals to support NFC transactions, Samsung Pay can be used at all point-of-sales terminals currently using magnetic-stripe technology; no new terminal technology is necessary.

Starting Oct. 1, the U.S. began a fraud liability shift tied to the adoption of EMV chip cards—short for Europay, MasterCard and Visa. The shift has prompted retailers to upgrade terminals to newer models with NFC capability, but the change over hasn’t taken full effect.

Once merchants switch to newer terminals that will process near-field communication transactions, however, Samsung will lose that advantage. The hope is that the company, which runs on Alphabet’s Android operating system, will be able to retain customers who had already begun using Samsung Pay.

“Our view remains that the act of entering one’s financial credentials into any system likely reduces churn away from that system,” Citibank analyst Ashwin Shirvaikar wrote in a note, “so the entry and focus on a native payments engine makes sense.”

PayPal

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PayPal
PYPL, -0.71%
was also active in the in-store mobile payments space long before Apple Pay. However, its point-of-sale mobile system doesn't have the ease and convenience of Apple Pay, which can be used without unlocking a phone.

PayPal’s system requires users to open their phone and enter the app, check in to the store and choose how to pay, which has slowed adoption.

In March, the payment company bought mobile wallet company Paydiant, which processes payments through QR codes. The deal also granted PayPal access to the consortium of merchants in the MCX.

PayPal also offers a card reader, much like that offered by Square (see Slide 8), for small businesses or mobile transactions. Business owners can plug the add-on into the headphone jack of an iOS or Android device, download an app and start accepting credit and debit card payments.

PayPal rolled out a new reader with near-field communication technology at the end of September. This means small-business owners will be able to accept Apple Pay, Android Pay and other forms of contactless mobile payments. PayPal also operates the peer-to-peer payment app Venmo.

Bloomberg

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CurrentC is a mobile payment app being developed by MCX. The app was devised as a response to Apple Pay, but is owned by the merchants themselves. The app is in beta only for residents of Columbus, Ohio, and was first unveiled in 2012.

“It’s suffering from a failure to launch,” said Nick Holland, senior payments analyst for Javelin Strategy Research. “We’ve been talking about MCX for about three years now, and it is still conspicuously absent from the conversation.

CurrentC will use QR codes to process payments rather than near-field communication. More important, as it is a merchant-owned mobile payment system, users can load their rewards accounts along with debit, credit and gift cards, and continue to receive loyalty points, rewards and special offers.

According to the description in Apple’s app store, CurrentC will be able to hold all merchant coupons. It will not store sensitive financial data on a phone or share it during transactions, although the description doesn’t specifically mention tokenization.

Starbucks

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People who aren’t Starbucks Corp.
SBUX, +0.23%
fanatics may not know it, but the coffee giant has had significant success in the mobile payments market, albeit solely as an in-store Starbucks experience.

Since 2009, Starbucks has allowed customers nationwide to simply present a QR code to be scanned at the point of sale.

During the Seattle-based company’s January earnings call, Chief Executive Howard Schultz said Starbucks had more than 13 million mobile app users in the U.S., and that mobile payments accounted for 16% of the company’s total transactions.

“In terms of overall usage—Starbucks,” said Javelin Strategy’s Holland, running through the winners and losers of the mobile payment war thus far. He said it is likely we’ll see other companies follow in Starbucks’ footsteps. Department store chain Neiman Marcus has also announced a mobile payments app.

Jawbone.com

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Jawbone, which made its name in fitness bands, partnered with American Express Co.
AXP, +0.32%
to fuel the use of wearables in mobile payments. Jawbone’s Amex partnership came on the heels of the Apple Watch release, which uses Apple Pay.

With Jawbone’s UP4 fitness band, Amex card holders can sink account information through the band’s mobile app, and use the band to pay as if they were using the card. The UP4 uses NFC technology, as well as all the same protections as users’ Amex card. It does have a separate number from the plastic credit or debit card though.

Bloomberg

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Square, which has announced its plans for an initial public offering, has been helping small businesses and mobile business owners process credit and debit card payments since 2010. Square, which was co-founded by Chief Executive Jack Dorsey—who is also CEO of Twitter Inc.
TWTR, +1.64%
—was one of the first devices operating as a mobile cash register, of sorts.

Square currently operates with magnetic stripe cards, but it has plans to start shipping Square readers with EMV chip capabilities in the spring (For more on EMV, see Slide 9). In a late November interview with CNN Money, Dorsey said that Square will incorporate near-field communication technologies to be able to begin accepting Apple Pay in 2015.

According to the Square security Web page, the company also uses tokenization technologies and monitors transactions “as they’re happening” to prevent fraud.

In addition to its consumer-to-merchant transactions, Square offers a peer-to-peer app called Square Cash, where friends can send money to one another in real time a la PayPal or Venmo. Square also partnered with Snapchat for its peer-to-peer payment system Snapcash.

Whole Foods Market

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Near-field communication

Also known as NFC, this is the technology that allows customers the ease and convenience of seamlessly putting their iPhone up to a terminal and using their fingerprint to pay without having to unlock the phone.

NFC uses electromagnetic radio fields to share information. Just think of it as a way for devices to communicate with one another. It’s the same technology that allows some phones to “bump” to share data.

Tokenization

Each payment system has its own way of storing the financial data users load onto their phones, but for the most part, they seem to be leaning toward tokenization to make sure it is secure. While credit and debit cards with magnetic-stripe technology store your bank information on the that stripe and share it every time the card is swiped, with tokenization a one-time, 16-digit code is created and used instead of the financial information.

Sure, a hacker could gain access to that 16-digit combination, or “token,” but they would only be able to use it at the store in which it was created during the purchase.

Whole Foods Market

Slide 12 of 12

Near-field communication

Also known as NFC, this is the technology that allows customers the ease and convenience of seamlessly putting their iPhone up to a terminal and using their fingerprint to pay without having to unlock the phone.

NFC uses electromagnetic radio fields to share information. Just think of it as a way for devices to communicate with one another. It’s the same technology that allows some phones to “bump” to share data.

Tokenization

Each payment system has its own way of storing the financial data users load onto their phones, but for the most part, they seem to be leaning toward tokenization to make sure it is secure. While credit and debit cards with magnetic-stripe technology store your bank information on the that stripe and share it every time the card is swiped, with tokenization a one-time, 16-digit code is created and used instead of the financial information.

Sure, a hacker could gain access to that 16-digit combination, or “token,” but they would only be able to use it at the store in which it was created during the purchase.

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